10/06/2012 13:49 BST | Updated 10/06/2012 16:57 BST

Eurozone Crisis: Spain's Prime Minister Mariano Rajoy Warns Of Pain Ahead

Spain's plea for a banking bailout of up to £81 billion is set to lift markets on Monday despite its leader's grim warnings of more pain ahead.

Spanish Prime Minister Mariano Rajoy admitted that its banks needed a cash injection and warned of another "bad" year to come, with the country expected to remain in recession and unemployment set to worsen.

"If we had not done what we have done in the past five months, the proposal yesterday would have been a bailout of the kingdom of Spain," he said.

spain bailout

Rajoy said that despite the bailout, "this year is going to be a bad one.

“Yesterday, the credibility of the euro won, yesterday the future won, yesterday, the European Union won."

Although the situation in the eurozone's fourth biggest economy remains bleak, there are hopes that the eventual injection of up to 100 billion euro (£81 billion) for its creaking banks will help to avoid the meltdown of the eurozone.

Spain's borrowing costs, which have risen to unsustainable levels in recent weeks, are expected to fall back tomorrow, while world markets are set to regain some of their recent losses.

Markets have suffered hefty falls in recent weeks amid fears Greece will reject austerity and crash out of the euro and that Spain would fall into difficulty and prove too big to bail-out. They have already made up some of their lost ground last week amid speculation of a deal for Spain.

A final figure on the size of the bailout will only be available later this month following the completion of two audits of the financial system.

The cash is expected to come from the eurozone rescue fund, with the International Monetary Fund overseeing the payments but not putting up any money.

The terms of the deal Spain is set to receive is likely to reassure markets because it has none of the strings attached to previous bailouts of Greece, Portugal or Ireland, when tough austerity measures were demanded.

Spain's financial problems are not due to Greek-style government overspending. Instead, its banks got caught up in the collapse of a real estate bubble in 2008 that then got worse over the next four years.

There are fears the problem will get worse as more jobless people are not able to pay their mortgages.

It has already nationalised its fourth biggest lender Bankia, and four other banks serving the domestic market are considered prime candidates for bailouts.

Mr Rajoy said today that despite the bailout, "this year is going to be a bad one".

He said more Spaniards will lose their jobs in a country where one out of every four are already unemployed and the economy will still contract by the previously predicted 1.7%.

However, small businesses and families starving for credit will eventually get some relief as the funding props up banks and they increase lending, but he did not say when.

Although the planned bailout has eased some nerves over Spain, further storms lie ahead for the eurozone.

Chancellor George Osborne this weekend warned that the UK faces a lost decade unless the eurozone crisis is brought under control.

Speculation is mounting that Cyprus is close to receiving a bailout and that Portugal may need a second tranche of aid.

Meanwhile, Greece faces a crunch election next Sunday, which is widely being seen as a referendum on whether to stay in the eurozone or reject painful austerity measures.